Can I use equity crowdfunding for my private company?

Published 29 Jan 2019

With the rise of inexpensive online platforms created to source support for projects, crowdfunding has become a viable way for businesses to raise money for their operations and expansions. But until recently, private companies were unable to engage in equity crowdfunding, a limitation that bound the usefulness of the financing concept for smaller businesses. 

What is traditional crowdfunding?

Regular crowdfunding works by soliciting donations from the public for the purpose of reaching a certain goal. Crowdfunding can be used for a variety of projects, but for businesses it's typically to launch a product or service. An online page is set up for your business, describing the product or service you're creating and what you need the money for. 

Calling the money raised 'donations' is something of a misnomer however, as most crowdfunding campaigns give rewards depending on how much someone pays. In some cases, companies actually sell the product they're developing as a reward, making crowdfunded dollars essentially pre-orders for a product that's yet to be made. 

How is equity crowdfunding different to regular crowdfunding?

Unlike the regular format, equity crowdfunding allows the public to buy a piece of the business itself. In effect, it gives smaller businesses the chance to get investors on board with their company without having to go public or pitch to a venture capitalist. Marketing buzz around a company and it's products can be built, potentially giving businesses much more exposure than they would following a more traditional equity-raising route.

Can private companies utilise equity crowdfunding?

The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 was passed in September of 2018, extending the right to use equity crowdfunding to private companies. That said, there are a few restrictions and rules businesses need to be aware of.

The first is that private companies can only utilise equity crowdfunding if they have revenue and gross assets of less than $25 million. The other is that only $5 million can be raised from equity crowdfunding in a single year.

Private companies are limited to having fewer than 50 non-employee shareholders, but investors that come through a crowdfunding campaign are excluded from this number. Directors and annual financial reports will also need to be created for businesses following the equity crowfunding path.

If you're planning to raise funds for your business and need legal advice on what your options are, get in touch with the team at Malouf Solicitors today.

Please call us on 02 8833 2000 to speak with a lawyer

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